Moody's downgrades APAC credit outlook amid tariff disruptions and geopolitical shifts

Moody's Ratings has revised its credit outlook for Asia-Pacific (APAC) sovereigns from stable to negative, citing mounting risks from escalating trade tensions and geopolitical volatility.

The shift in US trade policy, particularly the sweeping imposition of higher tariffs and subsequent negotiations, has injected unprecedented uncertainty into global trade, with significant disruptions expected for APAC economies. These shifts are set to reverberate through investment flows and fiscal stability, threatening to undermine growth prospects across the region.

Trade policy uncertainty weighs on growth prospects

According to Moody’s analysts, the US tariffs unleashed in April 2025 have sparked severe uncertainty over trade policies, prompting lower growth expectations for APAC economies. As a result, Moody’s has downgraded its GDP growth forecasts for 2025 and 2026 for 20 out of the 25 rated APAC economies.

“Uncertainty about trade policy and a potential overhaul of global trade have raised cyclical and possibly structural credit risks in APAC,” Moody’s analysts wrote in the update. “A weaker external and investment outlook has tempered growth expectations, while countercyclical policy responses could hinder fiscal consolidation efforts.”

Economies like China, Taiwan and Vietnam, which rely heavily on exports, are expected to experience slower growth. China’s growth forecast for 2025 has been slashed to 3.8%, down from 4.5%, with a weakened outlook extending into 2026.

The long-term risks of tariff-driven trade shifts

The tariffs represent a significant long-term credit risk for economies that have capitalised on shifts in manufacturing investment away from China. Countries like Cambodia and Vietnam, which have attracted substantial foreign investment, are particularly exposed to the impact of higher tariffs.

“Higher tariffs could harm the attractiveness of some APAC economies, leading to a structural decline in foreign investment that undermines long-term growth,” Moody’s said.

Cambodia, for example, has heavily relied on foreign direct investment (FDI) to power its export manufacturing sector. The 49% tariff imposed on Cambodian exports to the US could drastically curb investment flows into the country.

Similarly, Vietnam’s standing as a manufacturing hub is under threat from continued tariff uncertainty, although it is in a somewhat stronger position due to its broader export base and trade agreements.

Monetary and fiscal policy adjustments amidst weaker growth

In response to the mounting economic challenges, Moody’s expects APAC central banks to adopt more accommodative monetary policies. Analysts predict interest rate cuts throughout the second half of 2025 as growth prospects dim.

“We expect many APAC central banks to resume rate cuts over the second half of 2025 as economic conditions slow,” the analysts noted.

Fiscal responses will also vary, with some governments introducing more spending to support growth. China, for instance, has significantly widened its fiscal deficit, while South Korea unveiled a supplementary budget worth KRW 20.2 trillion in June.

However, this ramped-up fiscal spending risks complicating efforts to achieve fiscal consolidation across the region.

Liquidity risks for frontier markets

Financial markets in APAC have experienced heightened volatility amid trade uncertainties, making borrowing conditions increasingly difficult — particularly for lower-rated frontier economies. Moody’s analysts caution that countries with substantial external debt challenges, such as Bangladesh, Sri Lanka and Mongolia, face greater liquidity risks.

“Weakened financial conditions are raising liquidity risks, especially for lower-rated frontier markets,” the analysts said.

These economies, which are already grappling with limited foreign exchange reserves, are vulnerable to rising borrowing costs as global financial conditions tighten.

Geopolitical uncertainties amplify challenges

Alongside trade disruptions, geopolitical tensions between the US and China are compounding the region’s challenges. The US has urged its regional allies to ramp up defence spending in response to rising geopolitical tensions, potentially diverting fiscal resources from economic growth.

“Geopolitical shifts will test APAC economies,” Moody’s said, noting the growing difficulty for governments to balance economic goals with the need to boost defence budgets. Countries such as Japan, South Korea and Taiwan are already ramping up defence spending, which could place further strain on their fiscal policies and limit their ability to support growth.

The negative outlook for APAC’s creditworthiness is driven by a perfect storm of trade disruptions, weakened growth prospects and rising geopolitical risks. While Moody’s sees the potential for an improved outlook, it said the region’s vulnerabilities are likely to persist unless these uncertainties are resolved.

“We would revise the outlook back to stable if trade talks significantly reduced US tariffs, stabilising growth prospects and funding conditions,” the analysts concluded. “Conversely, an escalation in tariff rates, a sharp rise in spreads or protracted geopolitical conflicts would deepen the negative bias and trigger worsening credit conditions.”